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PSS World Medical Inc. (NASDAQ:PSSI)

F1Q10 Earnings Call

July 23, 2009 8:30 AM ET

Executives

Robert C. Weiner - Vice President, Investor Relations

David A. Smith - Chairman and Chief Executive Officer

David M. Bronson - Executive Vice President and Chief Financial Officer

Gary A. Corless - Executive Vice President, Chief Operating Officer

Kevin P. English - Senior Vice President, Supplier Operations

Scott Helfrich – Vice President, Strategic Sales Development

Analysts

John Kreger - William Blair & Company

Atif Rahim – JP Morgan

Richard Close - Jefferies & Co.

Robert M. Willoughby - Banc of America-Merrill Lynch

Glen Santangelo – Credit Suisse

Larry Marsh – Barclays Capital

Eric Coldwell – Baird

Alex Beckler - Goldman Sachs

John Ransom - Raymond James & Associates, Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the PSS World Medical’s first quarter fiscal year 2010 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer question. (Operator Instructions). As a reminder, this conference is being recorded Thursday, July 23, 2009. It is my pleasure to introduce Robert Weiner. Please go ahead sir.

Robert C. Weiner

Good morning everyone. Thank you for joining our fiscal year 2010 first quarter call. Today on the call, our speakers are David Smith, Chairman and CEO; Gary A. Corless, Chief Operating Officer; and David Bronson, Executive Vice President and CFO.

We issued our fiscal year 2010 first quarter press release last evening. The release and our Financial Workbook for our first quarter are available on our website at www.pssworldmedical.com. The Financial Workbook contains GAAP and non-GAAP financial measures that provide greater detail into each business and the overall operation.

Now, I'll read the forward-looking statement. During this call, we may make a number of forward-looking statements regarding revenue, gross margin, operating expenses, operating margins, earnings per share and other matters that are not historical facts.

These statements involve a number of risks and uncertainties that could cause actual results to differ materially from what is expressed or forecasted. For a list and descriptions of certain of these risks and uncertainties, we refer you to the forward-looking statement disclosures in today's press release and to the other information provided in our most recent Form 10-K and other SEC filings, copies of which are available from the SEC, from our Investor Relations section on the website or from us in Investor Relations.

The company wishes to caution listeners of this call, and its replay not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995, and as such speak only as of the date made. The company also wishes to caution listeners that it undertakes no duty to update or is under no obligation to update or revise forward-looking statements.

We may reference certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You will find these reconciliation charts at the end of our Financial Workbook and in our Form 8-K on our web site and submitted to the SEC. Thank you for that.

Let me take a minute now to alert our listeners to upcoming investor events where our team will be speaking and meeting with investors. Next week, we will be in Kansas; Texas, Salt Lake City; on August 10 and 11, we'll be meeting investors in Minneapolis and Toronto; and the week of August 24, we’ll be in Europe; and finally in September, we will be at the Robert Baird Smith conference. Please let us know if you would like to schedule a meeting.

For our call today, we will follow our formal remarks by Q&A session, as prompted by the operator.

I'm now pleased to turn the call over to David Smith, PSS World Medical's Chairman and CEO.

David A. Smith

Thanks Rob. Good morning everybody. Two things to tell you first before I get started: First, I may not quite be the same person as you normally hear on the call; I had a foreign body come join me last night all night. I can’t wait to go see one of our customers. A little color on that is I don’t know if I have food poisoning or something worse, so I will find that out here in another hour or two. As far as color goes, the second point is that I think we are going to be able to provide real color to some of the holes that we had in investor day. To give you some facts and details, and some real articulation of the tactics that we were reticent to tell you at investor day, until we had the programs rolled out to our people until we saw some traction on the streets. So, I think it will be an interesting call. We will give you some of those. We will also talk to you about how we are not raising guidance this quarter, and when we will analyze that for that decision. We are going to talk about why we believe why we are winning and the things that I think are sustainable in those items that are causing us to win. Some highlights for the quarter, and then I will talk to you about what’s going on in the national scene including Washington and reform and swine flu. Then, Gary Corless will talk to you about how this plays out on the street with customers and our people, and David Bronson will give you a financial report and financial analysis of the quarter. So with that, let’s get started.

We started this year with a confirmation of our 20% EPS goal with most of our strategies intact. However, supporting tactics and goals were completely reset as a result of the changing environment. The tactical course correction and volume of internal changes caused serious concern and stress in our leadership. At the end of the day, we relied on our people, our culture, our core strengths including the company’s past ability to turn on a dime without losing sight of our principles and mission.

So, our first real tactical change as a result was to go in the opposite direction of our competition because we believe they fundamentally got it wrong. They laid off or fired thousands, cut services, and distracted their people, so instead of laying off or firing, our goal is to save 300 jobs, and our people really get that.

The second area of change in tactics is that we believe our customers are absorbing the blunt trauma of spiraling administrative cost, complexity of building and shrinking reimbursement. Because we have created a sales force bandwidth with customer innovation and automation, a line compensation to strategies, and developed timely solutions to customer problems, our tactics to achieve two times market sales growth have changed. The adjustment is to reach thousands of new customers leveraging our strength and competitors weaknesses while we strengthen existing customers with the same solution; a big change for us.

The third change in tactics is to create a 3500-person army moving as one together, leading innovation and efficiency through our lean initiative, changing the fundamental cost structure of our business model in response to the new economic realities. Our goal here is to deliver 20% earnings growth through efficiency and teamwork against the economic headwinds of slower revenue fundamentals.

The fourth and last tactical change is to have fun. That’s right, fun. In this economic tragedy by delivering the best year of culture in the company’s history with 3500 inspired employees having fun, attacking competition, solving new and existing customer’s biggest issues, reducing cost, and saving 300 jobs through efficiency innovation. Our goal here is to have the best year of culture ever while we deliver 20% earnings growth, grow at 2 times the market, and improve our strategic advantage.

Now, all together, honestly, we were more than a little concerned by all the changes compounded by the uncertainty of our environment and our own people’s response to this plan.

Through the first quarter, we are clearly ahead of schedule, but don’t get too excited yet and don’t get ahead of us. We live in a choppy and complex environment with intense customer pressures and competitive forces. It is too early in a four-quarter year to claim victory or predict over-achievement. We believe a 20% growth in this environment is a victory. We have never felt good enough based on the visibility to our plan or environment to adjust goals after Q1. After Q2, with five or so months to go, we will evaluate our annual goals. To say another way, if we are living it and don’t see it clearly enough, you should not feel comfortable believing it yet. But, this is what we do believe. We do believe we are ahead at Q1 for the following reasons: First, customers are more open to solutions than ever before, and they want answers from people they can trust. Second, competitors have zigged when they should have zagged. Fifty percent of the market is mom and pop competitors, and these companies may be running out of options. Third, our people are more open to change because of the crisis, plus they are inspired by the mission and freedom to author innovation. Fourth, the previous investments are coming on line that accelerate our progress and expand our profit runway. Fifth, we adjusted current investments quickly enough to produce solutions that are winning on the street today. So, those are the things that are winning, and we think they are pretty sustainable.

Now, the highlights for the quarter. First, margin. Both divisions grew operating income about 30% in the quarter. When revenues are growing single-digits and customer services are expanding, these results can only be directly attributable to a 3500-person team moving as one, inspired to take care of each other, feeling tangible passion for taking care of their customer while focused on delivering for you, real shareholder value.

Cashflow. Our balance sheet is strengthening in this time of economic gloom. We have over a 120,000 provider sites using our solutions and services from California to New York, from Florida to Oregon. Yet, they value us not only to buy more from us for products, solutions, and services than our competition. But more importantly, they are paying us.

Reach. We believe the customer will buy less due to the patient economy. There will be consolidation in the market, and competitors have miscalculated. In our camp, our gains in sales-force bandwidth automation, select product expansion, and unique menu of solutions have created a sustainable opportunity to attack for market share gains. The physician business reach goal for the year is 7000 net new customers. They grew over 5000 new customers in the new quarter. It is too early though to determine the long-term impact, how many accounts we will keep and whether we will beat the net goal, but it is clearly an early indication that our strategy is timed correctly.

And the last highlight is select. Elder Care led the growth in select products with 25% growth in physician at 15% growth in the quarter. We are expanding our product breadth as we invest in advanced products and strengthen quality and feedback processes. Our customers basically appreciate our offering and see it as one more reason they should to more with us.

Now, to the Washington and national scene. I will start with HIT. The final rules for meaningful use for HIT will not be published until January, but real changes appear to be underway. CCHIT certification along with their vendors and lobby lost a lot of ground in the last 30 days. The following new recommendations have been published. First, by 2013, providers must allow patient electronic access to personal health records, big change. Second, by 2015, providers must have capability to exchange all health information, big change. Third, they have to provide patients with electronic copies of discharge instructions and procedures. Fourth, CPOE systems and clinical decision support rules have been added to the base definition.

These additions both expand and accelerate meaningful use of VHR systems and diminish the hold the existing Cerner and All-Scripts type companies have on this marketplace.

Next topic is healthcare reform. We could speak for an hour or two on just this subject. I believe next quarter or the one after will be a more appropriate time to discuss reform. We expected and said at investor day, the food fight would begin in July and August, and clearly it has begun.

Swine flu. Dr. Nicole Lurie has just been named the new secretary of preparedness and response to manage, among other things, the $884 million purchase of swine flu vaccine materials. The vaccine management has been delegated to the CDC who has delegated to the states and directed them to distribute it. The details of the plan are not existent at this time. The new flu has impacted children and young adults the most, so we believe schools will be the first in line. The vaccine is still being tested, and based on early immune response, it may require a two-dose inoculation to be effective. We also believe the manufacturing is difficult, and a later release date is probable or less supply than desired. They are also looking to have public testing the second week in August. The United Kingdom program in the Wall Street Journal this week indicated its plan is to have 30 million doses of vaccine for citizens. Their strategy is not to contain but to treat. The William Blair report of July 17th on the upcoming flu season was insightful to us and the best we have seen from the sell side so far.

We benefited from the flu in Q1 with an estimated $9 million of revenue with average gross profit of masks, sanitizers, flu test kits, etc. We expect to sell 2.5 million doses of regular flu vaccine from Novartis this season. We really do not have any way to budget or predict what will happen from October through March for this year for swine flu. However, we are taking steps that you would expect us to take. We are manufacturing and stockpiling flu-related products. We are creating education and solution programs for our customers, and we are investigating and communicating with all authorities and participants. So, at this time, I will turn the call over to Gary Corless, Chief Operating Officer, of the company.

Gary A. Corless

Thanks Dave. In the past 100 days or so through the wonders of newer technology like webcast and older technology like airplanes and e-mails and cellphones and just good old ride days out in front of the customer have been in constant and consistent contact with our sales and operations leadership, our sales force of 800 plus, and our customers. I will share with you what I have heard and seen with regards to our strategies, their acceptance by the customer in the field, and ultimately our performance. I will tell you that despite the challenges of this environment and in some cases because of the challenges of this environment, we are growing our business. So let’s talk about how.

Let’s start with PSS. The two strategies I’ll cover today are reach and strengthen. First, reach as Dave mentioned is a growth strategy designed foremost out of opportunity. Our past five years or so of growth have come mainly from kicking competitors out of our own account. In other words, penetration is our way of getting a greater share of the customer’s wallet. We believe it was wise, and we know it was profitable. We will work to continue this success for those reasons. Yet, this new environment of customer uncertainty and anxiousness has opened up rear windows of opportunity that we cannot and will not pass up. Therefore, through a full company-wide effort, sales, operations, marketing, customer service, and delivery, we are moving as one to open new doors.

Through massive coordinated and designated cold calling days to customer service followup programs to special customer offers, all delivered by the largest face to face sales force in the industry. We are opening doors. How many? Over 5000 new customers in the 90 days of Q1. That is over 70% of our annual goal of 7000 which was based on 10 new incremental customers per rep this year. So, why is it working? After talking with administrators, doctors, nurses, and sales reps, I will tell you what I have seen and heard.

Customers are more open than ever to new solutions and people that can help. B. Competition often lacks our full offering and our focus. Remember over 40% of the market is still held by independent and regional supply companies without the resources to match up. Many have fully leveraged their longstanding relationships and now find themselves lacking in answers. C. Lastly, our entire team is moving as one. A great example is PSS sales rep Steve Davis who used a combination of PSS competitive advantages to commence Lee OB-GYN in Alabama to switch their business to us, this 8-doctor OB-GYN office, a real benefit in our service offering, especially our delivery professional, Larry Patterson as well as our ecommerce solution. The nurse commented she likes the way we make it easy. Easy to do business with is our mantra, and it is appreciated now more than ever. Our PSS rep Derrick Galveston in Northwest won the business in Corbell Family Medicine once he was able to sit down with the office manager and show her the benefits our barcode scanning and ordering tool, SmartScan. Her hot button? The time our solution would save her.

Our e-commerce solutions help free up the doctor’s biggest expense, payroll, by enabling the office personnel to do what they were hired to do, take care of patients, not order supplies. At the same time, it frees up our reps to the help even more customers. Another example may be PSS rookie rep, Nicole May, in El Paso, Texas, who sat down with a nurse administrator of an 18-doctor orthopedic practice who had been with their current distributor, or should I say past distributor now, for 20 years. After talking through their business issues, Nicole discovered that they had never seen the benefits of e-commerce and had been on the wrong vendor casting contract for years, costing them thousands and thousands of dollars. Nicole proved to the account and probably to some other PSS reps that a smart, hardworking rookie can beat a complacent pro.

Now, lets talk about our strengthen strategy. Strengthen is all about growing by helping. The doctor’s office may be different from other small businesses in many ways. It is very similar in that it too needs to improve the care of its customers, increase its revenues, control its cost, and increase its efficiencies. One new way we are helping customers achieve these is through something we have previewed on Investors Day, and that is the customer business review. Not a new concept in the business world, but very new in the small businesses of doctor’s offices.

In a formalized way, we walk through a system generated yet customized review with their business. We highlight where they are spending their money and opportunities they may take advantage of, giving them the benefit of our working knowledge of over a 100,000 active doctor customers. We show them ways to improve their clinical and financial outcomes like generic injectables for saving, IT tools for efficiency, clinical solutions for care, and our brands for quality and cost control. More than many times, we have heard, “this is why I do business with you.” A good example is PSS rep, Mark Ellison, in the Southeast who had a business review with one of our very large orthopedic customers in Huntsville, Alabama. We showed the CFO of the group, the opportunity to switch to the generic equivalent of Depo-Medrol, saving them over $20,000. The CFO then very pointedly told Mark that our competition had been in there trying to get them to switch, but he won’t because we continue to proactively look for ways we can help strengthen them.

I will close with Gulf South. Much like PSS, we have the same opportunity for growth in Elder Care by matching our solution and competitive advantages to customer’s problems and competitor’s weaknesses. We are improving the business health of the skilled nursing facilities and home care customers by helping them improve clinical and financial outcomes. One example of our direct positive impact on their financial outcomes is the customer’s enthusiastic acceptance of our brands as a way to meet their needs for quality and cost. In Gulf South, our brands grew just shy of 25% in the quarter. In addition, we are helping nursing homes solve their biggest problems like the new 5 star rating system which is designed to give the healthcare consumer an easy way to understand nursing home quality by visiting the CMS nursing home compare site. The 5 star rating can have real impact on the skilled nursing facility census and revenue, image within the community, and with plaintiff attorneys and their access to capital.

Now, here’s where we come in. To renew an exciting partnership with Pathway Health Services, a nationally recognized consulting and management company, we are able to offer our customers real answers and a plan to drive the highest 5 star rating. In addition, we can help them at other important areas of need likely preparing for CMS’ implementation of QIS, the quality indicator survey. We at Gulf South have the exclusive rights to sell these programs and services within eldercare.

A strong example of the power of this new partnership is how we are able to help Memorial Nursing Home in Louisiana. When Gulf South rep, John Boudreau, asked the administrator about what was really keeping him up at night, the opportunity to really do something significant became apparent. The administrator knew we needed QIS preparation because his facility was due to be surveyed in July, and he needed his staff to be fully trained and ready. John, our rep, brought the solution to their need for the QIS survey preparation.

Our new partnership with Pathway was instrumental in solving this significant customer worry point. Upon completion of the process, the customer stated he was pleased with every aspect of the Pathway offering, how they came into his building and worked alongside his staff, how they coached them on the QIS process, and how to gather the information. This was and will be a significant differentiator for Gulf South. We will generate revenue through the sale of these programs, yet we believe the real opportunity for growth is through our ability to strengthen and reach new customers using truly substantive solutions such as these. It is early on, but we are excited.

In closing, I would say that in many ways, it is a new world for our customers, and therefore, a new world for PSS, Gulf South, and our competitors. We look forward to the new basis of competition and the reward and shakeout that will come with it. Thanks. I will now turn it over to our CFO, David Bronson.

David Bronson

Our fiscal year got off to a very good start. Our go to market strategies are working, margins continue to expand, and actions we took to reset our cost structure paid off, and we generated record cash flow. I think the three of us here would all agree though that one of the most gratifying aspects of the past quarter has been the alignment and full engagement of our organization from sales reps to field operations, corporate shared services; the team dynamic feels really good right now, and I think it shows in the results. Revenues grew by $21.3 million this quarter, about 4.5%. The physician business grew by 3.3% helped by about $9 million of product sales related to testing and treatment of swine flu.

Equipment sales in the quarter were again below prior year by about $4.9 million. The number of leasing applications initiated in the quarter, which is a good barometer of customer’s appetite to invest capital in any given time, is slightly below prior year, and the number of applications denied based on credit-worthiness is slightly up. As we saw last quarter, the biggest declines are in equipment categories that relate to discretionary or nonreimbursed procedures. Elder Care revenues grew by 7.1% in Q1. Hospice and home care growth was in the mid-teens, and nursing home sales grew by about 6%. As Dave mentioned, sales of our select private label products continue to grow nicely. Overall growth was 18.9% and is now just under 16% of total revenues.

The traction we are seeing in our lean and business simplification strategies along with the cost management initiatives we launched in Q4 of last year resulted in operating expenses actually below prior year in each of our businesses as well as in corporate overhead. That success dropped through the entire growth and revenue gross profits to the operating income line. We had a 17% drop-through of new revenues to the operating income line, which improved overall operating margin by almost 60 basis points from a year ago. As Dave mentioned, both divisions grew operating income by 30% over prior year, Q1.

Now, as we mentioned at investor day, during the quarter we sold the remaining Athena Health shares that we had purchased prior to their IPO and recorded a $3.6 million gain in other income. That gain along with a favorable impact of swine flu related product sales and operating results that exceeded our internal expectation required an adjustment to accruals for long-term incentive comp for our officers, leaders, and employees. Now, unlike our short-term or annual bonus programs which are tied to components of our strategic plans and to individual achievement, our long-term incentive plans for our leadership are designed to align those awards with shareholder interests, primarily growth and reported earnings per share. They have provisions for over-achievement or acceleration if performance exceeds the goals set by our board, the same goals that we communicate regularly to all of you in the form of 3-year EPS growth targets. Another design feature of these plans is that they are self-funding.

In other words, the attainment of the EPS target is measured after or net of the cost of the program. Compensation expense for these programs is recognized over the measurement period, 3 to 5 years in most cases. Estimates of actual performance relative to targets are used based on our internal forecasts. When there is a significant change to those estimates, whether it is due to one-time events or the trajectory of the business, true-up-adjustments to those accruals are required. These adjustments by necessity are recorded in a given quarter but reflect our expectations for performance over the whole plan period, not necessarily the results for that particular quarter.

The adjustment required in this quarter to true-up our accruals to our expected performance was $4.9 million. The largest piece of this was for restricted stock granted a couple of years ago to officers and leaders that had a 5-year vesting period that can accelerate to 3 years if certain EPS growth targets are achieved, which we now judge to be likely. This adjustment reflects the catch-up needed to recognize that cost over 36 months instead of 60 months as well as increased overall performance relative to targets indicated by our results this quarter.

The accounting rules require that these accruals be evaluated at each balance sheet date, the implication being that if our actual or expected performance were to deteriorate, the accrual and the related expense would be adjusted downward, and you may remember that that is exactly what happened a year and a half ago, when due to flu inventory write-off and pedigree cost, we reduced long-term compensation accruals by a similar amount, about $5 million. All the details on these plans are covered in more detail in our proxy and other filings, and we are happy to answer questions that you have as well.

This quarter, we adopted the new accounting for convertible debt as we signaled in the past calls and at investor day. The adoption of this pronouncement will add about $0.8 per share of noncash interest expense to our PNL this year. Prior year is also restated to make the years comparable under the guidelines. This change had the effect of reducing reported EPS by about $0.02 this quarter and $0.02 in the prior year Q1. Our adjusted GAAP EPS goal for fiscal year 2010, which again we shared with you at investor day, as $1.5 to $1.9 per share. FY09, prior year, will be adjusted and restated to $0.85 a share. Now, you can do the arithmetic that this change actually increases our year over year EPS growth from 20% to 26% at the mid point.

We will continue to break out the impact each quarter in our releases and on our calls until such time as all the analysts and all the investment community are consistent in how they establish and report targets.

Let me just wrap up with the balance sheet. As we reported last night, we generated $44.9 million of operating cash flow in Q1, truly outstanding performance that reflects both our diligence in working capital management as well as growth and profitability. Consolidated DSO’s or day sales outstanding improved by a full day from prior year and a little over half a day sequentially. We have seen a slight increase in aging, primarily in California as that state has struggled to balance its budget, and they have delayed re-imbursments to some of our customers, primarily Elder Care or issued in some cases IOU’s. We are watching the situation carefully and have contingency plans in place, although I would tell you the news in the last 48 hours on the state budget has been encouraging.

We ended the quarter with almost $130 million of cash. Our best use of cash will continue to be to identify and acquire fold-in businesses. We completed 2 small ones in the last 60 days and have several more in the pipeline.

Before we open it up for your questions, like to turn the time back over to Dave for a couple of closing comments.

David Smith

Thanks David. Before we go to questions, I just want to tell you what I’ve told the board in the previous couple of months. First at the beginning of the year, I told them I had never felt better about a strategic plan from a customer, people, and confidence standpoint, and at the same time, never felt more uncomfortable with the future because of the complexity of changes in the economy and healthcare. Now, fast forward 3 months at the end of this quarter, I told them, I’m inspired. Never have I seen the morale and focus of our people be this pure and determined. Our solutions are perfectly timed, and our opportunity is big. But all of this is tempered by the complexity and change in the economy and health care. So with that, we will open up the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question from the line of Atif Rahim – JP Morgan.

Atif Rahim – JP Morgan

Dave, could you provide any color on the swine flu sales as they are progressing? Have you seen them accelerate towards the end of the quarter or do you feel they are decelerating in any way and, then going forward, could you remind what your same-day sales growth target is for the physician business and does that now include the swine flu sales or are you calculating those separately?

David Bronson

We had the biggest push in swine flue sales the last week of April and the first few weeks of May and then it tapered down to a pretty low number in June and it is fairly negligible now. We don't know when or if that will kick back up, as to is that October, is that January, is that November, is that March. And, there is no way for us to really be able to predict that, so first the numbers for the year for growth for the physician business were 2.5% to 3.5% and that included our first part of the swine flu sales. Now, we couldn't include the second part, because we just really don't have a feel for it, so 2.5% to 3.5% included the $9 million or actually I think our numbers were more like $7 or $8 expected, but it included the initial part. They have stopped or slowed down as you would expect in the summer months, kids go back to school, things are going to get cranked up again, so we just don't know, we can't predict and don't know about a valid way to articulate it.

Atif Rahim – JP Morgan

On the 5000 customers you had during the quarter, could you provide us what the number was last year for the same time?

David Bronson

It just has been a pretty steady business. We had about a 100,000 buying sites over the 5 or 6 years where we have doubled the size of the business with those 100,000 sites because we have been penetrating our existing customers by removing competition, taking more of a share of the wallet of the existing customer and moving our solutions in. And, to be honest with you, we didn't pay anybody to go find a new account. We didn't ask anybody to find a new account. We were very happy penetrating our existing customer base. The shift in the market, the shift in the competitive response, the shift in what we believe is bandwidth freed up by the sales force automation, the select offering, other solutions, we just believe we have a unique time in history where we can attack the market in a very different way, so we set up 7000 net new customers as our goal, really didn't expect to have 5000 in the first quarter. It's very impressive what's going on out there, and the real key would be how many of those repurchase each month, how many stay with us over the long term, and how many we add in this next quarter and what does the thing look like for the year. Right now, it is really hard to predict that. You can talk about activity, Gary.

Gary A. Corless

Yes, we are seeing a lot of activity and to be honest with you a lot of excitement. In this environment, one of the best things that we could do would be get aggressive and focus externally. I can tell you that some of our people that are highly competent, that have been doing this for 30 years may not have actually gone cold calling in many years, so a little bit rusty at first. It’s amazing though what could be done when we get back out there. How many of those versus first quarter days of last year? Dave answered that question. What I would say is this is new activity going on out there, so we will update you again next quarter.

Atif Rahim – JP Morgan

On the select sales growth, any reason why those are much higher in the Elder Care business versus the physician business?

David Bronson

Well, first healthcare grew twice as much as physician. That’s part of it. The menu of products fit very well with their strategy.

Gary A. Corless

To a degree, it's a mix issue too.

Atif Rahim – JP Morgan

But, no new product launches, etc.

David Bronson

We are adding new products this year. Some 11 or 12 million of new products, I think, are coming along this year.

Gary A. Corless

Yes, and our brands match up against more of the Gulf South business than our brands match up against the entire PSS business where we have equipment and a lot of pharma and things like that which we don't have our brand equivalent.

Operator

Our next question is from the line of Richard Close - Jefferies & Co.

Richard Close - Jefferies & Co.

With respect to the comp accrual, I believe, on the analyst day, you talked around a $6 million number. In the quarter, you did 4.9 million. How should we read that difference in the actual versus what you initially talked about?

David Bronson

You know, Richard, a good part of the adjustment that we made this quarter catches us up and the fact that we are now projecting either acceleration or some modest overachievement of those goals will require additional accruals. In future quarters, they won't be material though, but $6 million is probably is a decent number. We just had $5 million of it to get us to where we need to be right now at the end of this quarter.

Richard Close - Jefferies & Co.

With respect to the physician business when you ex out that this swine flu, you are about 0.5% growth year over year in the quarter. How do you feel about the targets that you set on the physician business? I believe it was 3.5% to 4% annual growth target in that business.

David Smith

Yes. 2.5% to 3.5%. And, to be honest with you, when we set that target, we were in free fall, so having the business turn positive whether that was 0.5%, 0.6%, or 1% was a fantastic turn. We see a lot attraction whether it is Reach, whether it’s Strengthen, whether it’s Select, whether it is the programs that we have, so I would just have to tell you at this time that 2.5% to 3.5% looks right to us. We think that that is the right number for the year. We feel very good about the turn. I didn't know if it would happen in April, May, or June, and t happened in April, so just very happy with the response of the team, the solutions that have been built, the way the marketing programs have been built, and the way Gary has been managing the rollout and execution of these changes.

David Bronson

Richard, just to clarify, the 2.5% to 3.5% is the same-day sales number. The 3.5% to 4.5% is the total sales, and we have 5000 cases here.

David Smith

We have extra billing days this year.

Richard Close - Jefferies & Co.

When we look at the 5000 new accounts that added in the quarter and I apologize if you somewhat answered this, but how would you characterize how many of those accounts completely turn over everything to you guys and are slowly with you versus just letting you in the door or beginning to put their toe in the water.

David Smith

I can’t wait to talk to you about it next quarter. I really think it just needs more time. We got some big orders. We got some small orders. We got equipment orders. We got Band-Aid orders. I would just say we just need a little more time, another 3 months and we’ll know.

Gary A. Corless

Within the 5000, we have some that turned over their entire business and are now ordering online, and we have people that said I’ll give you a chance. Here’s a case of table paper, let's see how you do. So, that is up to us to now penetrate those accounts that we have acquired.

Richard Close - Jefferies & Co.

And, how do you feel your success has been in the past, if people just begin to put their toe in the water that eventually they give everything to you?

Gary A. Corless

I think it is great question. I think, if you look back over the past 5 years of growth which we primarily gotten out of a fairly stable customer base, I think our representatives have really proven to be pretty successful in actually leveraging an opportunity to now sell our entire offering, so I think, there is some past history that it shows that we can do that.

Operator

Your next question comes from the line of Glen Santangelo – Credit Suisse.

Glen Santangelo – Credit Suisse

When we were at the analysts’ day, you sort of suggested that we saw some nice sequential improvement in physician office visits as we came out of the winter month. Now, if I look at the physician office growth achieved reported this quarter, I back out the swine-related sales, it sounds like your organic revenue growth is in very low single digits. Could you kind of comment under the assumption that you are taking some market share, maybe where the market growth is, and hove we continued to see some sequential momentum in physician office visits now that we are at the end of July?

David Smith

First, where we are having that meeting, we were all grasping a straw as to what is really going on because we were right in the middle of the change. It appears to us right now that the market is still contracting. That was the report.

Gary A. Corless

In the most recent survey that I have been, 72% of the physicians responded that they have seen less patient volume than the prior year, and we believe that to be the case.

David Smith

So, we think the business is contracting. I think when you look at other people that report in the space or have subsidiaries in the space, they are reporting negative numbers. The fact that we are positive and other people are negative tells me that we are taking share, but it is really early in this whole process to be able to say the market went from 4% growth to minus 2% growth. I really cannot do that right now. There is not enough runway of data points to give you confidence. Also, equipment is contracting, replacement equipment is contracting, the leasing approval rates are still contracting, so it is just a little early to be able to figure that out.

Glen Santangelo – Credit Suisse

It seems pretty obvious year over year that maybe the market is in negative territory. I am just trying to gauge where we are today versus maybe three months ago. Does it feel like it is still getting worse or did we stabilize and maybe we are starting to see some signs of the contraction becoming less?

David Smith

I think we have stabilized. I don't think it is growing.

Glen Santangelo – Credit Suisse

In terms of physician office stocking, have you seen some of your clients destocking? Do you think that has impacted revenues and maybe as those inventory levels normalize out at some point that maybe you get that benefit down the road?

David Smith

I think that the hospital marketplace and the surgery center marketplace, that is the right conversation that we’re having, but in our doctor marketplace, there is nowhere to put the products. It’s in the drawer or the exam table, it’s in the refrigerator next to their lunch, it’s shoved up underneath the cabinet drawer. There is nowhere to put this stuff. It’s why we have immediate delivery every day. It's why our services fit with the way the business is run, so we just don't see the play in the inventory side like other parts of the medical surgical market does in the other bigger type accounts.

Glen Santangelo – Credit Suisse

Dave Bronson, you commented on the situation in California. Maybe could you give us a little bit more clarification on that. Are you concerned at all that the receivables in that market? Is it something of any magnitude that we should pay attention to or how should we think about that?

David Bronson

Two days ago, I reviewed the top 100 accounts in California on the eldercare side. We talked about every account. By and large, the accounts are paying us what they can. They value our service. They value the relationship. They are paying a little bit slower, so the aging has gone up. Our total exposure may have gone up, maybe $0.5 million to $1 million dollars in terms of the aging, but we are on top of the situation. We are working with the customers. We are putting them on plans. We are doing delivery on payment and those kinds of things. We are doing all the things you would expect us to do, and I have been encouraged that they seem to have reached an agreement on the budget and some of those payments to our customers will start reaching us soon.

Glen Santangelo – Credit Suisse

But at this point, you feel like your exposure is in the hundreds of thousands and not millions?

David Bronson

Correct.

Glen Santangelo – Credit Suisse

You commented you did too small acquisitions in the quarter. Can you maybe just give us a sense of how big they were, what you paid, and are we starting to see the acquisition landscape get a little bit better, given maybe some of the pressure your mom and pop competitors are facing?

David Bronson

We did one on the eldercare side up in Pacific Northwest and one a physician business at West also. Both of those were pretty small ones. They won't really move the needle this year in terms of a penny a share or anything like that, but they are indicative of the fact that we are kind of the buyer of choice in the marketplace and that the valuations and expectations around valuations are becoming a lot more reasonable. A lot of these folks are, as Dave suggested in his talk, running out of options. They don't have the full service offering, and so when they see us going into their accounts aggressively now where we maybe didn't do that as much before, I think it is starting to open up a lot of discussions.

Operator

Your next question comes from the line of Robert M. Willoughby - Banc of America-Merrill Lynch.

Robert M. Willoughby - Banc of America-Merrill Lynch

Dave, it looks like the inventory management here, you had your second consecutive quarter of just material shrinkage which is great. Is there something structural now or is this the run rate we go forward with or are you expecting any type of restocking at your end?

David Smith

I would just make a general comment and then I’ll let Kevin answer. We do have seasonal patterns in our inventory. We have some buy-ins that happen at the end of year in anticipation of price increases and then that inventory gets worked off in the fourth quarter and in the first quarter, and so that’s what you are referring to. I will let Kevin talk just about overall philosophy on inventory.

Kevin P. English

The only thing I would add to David's comment is that we saw above-average price increases last year, so position in inventory around our fourth quarter and into the first quarter was a little above average. Also we are looking to increase inventory positions around certain globally sourced products as the supply chain becomes a little choppy with some of the new regulations. Swine flu would also be an area where we are going to invest over the next 2 quarters, so I would say we are pretty much where we expect to be. There may be additional slowdown in inventory turns as those two inventory tactics come into play.

Robert M. Willoughby - Banc of America-Merrill Lynch

Your cash flow targets are pretty much intact for the year? You are halfway there as it looks like to me after the first quarter but basically in line with your expectations?

David Bronson

I would say the first quarter exceeded our expectations. I’d say we’re comfortable with the full-year goal that we have communicated, and just remember that there is seasonality through the year.

David Smith

Also at the end of the second quarter, we will evaluate annual goals for revenue, profit, growth, and cash flow that we put out initially, and I just don't think doing it now after the first quarter is the right thing to do. I think we need one more quarter of visibility into the programs and then make the adjustment.

Operator

Your next question comes from the line of Larry Marsh – Barclays Capital.

Larry Marsh – Barclays Capital

David, let me get you to elaborate first of all on your progress. Obviously you have very good result in the quarter with the message really being the topline wasn’t a big surprise; it was really on the margin. I know back at the analysts’ day in May you talked about the cost structure recalibration of T5 to $10 million opportunity and excitement of driving that collective goal, etc., so is the message here today that you are already ahead of that plan that would allow you to have gotten such a good result in the first quarter or everything is on track?

David Smith

You did miss the first part here, Larry, because I tried to give you some color that we didn't have at investor day on some of these topics. Yes, yes, no, and yes. We have a goal to save 300 jobs. We have a goal to have our team move as one to drive efficiency through our lean processes to offset reduced revenue growth, to deliver 20% earnings growth. We have exact targets of savings. We have timelines for those savings. The reason we are ahead is our people are inspired. Our people really get it. I think it is a fantastic mission, and they want to be a part of it and their authoring the innovations, they are authoring the change, and it is pretty fun here. It is inspiring to watch what is happening here. So, yes, we are ahead. I think it is too early to call it because after the first quarter, I think it just is. I think after the second quarter, we can look at our annual goals and see whether we should reset them. There is just not enough visibility into the year because of the complexity of the market and number of moving pieces that we have here. There are quite a few initiatives that we have ongoing, but it is hard for me to argue that we don't have the momentum, and yet just need a little bit more time to be comfortable with do all 5000 accounts stay, do all these initiatives keep the same momentum they have today, do we not just get ahead this quarter but do we then multiply that for next quarter to enable us to offset to slowdown revenue, so we are offering the business as if we are ahead and will stay ahead, but it’s just a little early for me to put a fork in the ground and say "okay, it’s done, let's change the annual numbers.” It’s just too early. We need a little more visibility into some of these issues. We needed more visibility at investor day to not really tell you about them; now we told you about them. Now we need a little bit more visibility to say that 20% earnings growth in this market was wrong; it's bigger. It just feels wrong right now. I just would like a little bit more time.

Larry Marsh – Barclays Capital

You also elaborated a little bit about how you are different in the marketplace with the Reach program, and you said something interesting at the beginning about competitors zigging when they should have been zagging, besides the fact that they are not offering as much as you are. Is there anything else of particular note that you think some of your competition is not getting right?

David Smith

I don't want tell him everything, so they’ll fix it, but I clearly think firing your people causes everyone to pause that is still there wondering what happens next to me and they think I’m going to take care of myself rather than the company. That’s not something that they can overcome quickly. Each one of them did fire 300 to 500 or 1000, so that kind of a big oops in my opinion because we just didn't believe in that. We believed that there would be more opportunity because the customer would be more under the pressure of the healthcare economy than ever and probably needs more services, so how do we create more income with those people and how do we grow the business with those people. So, yes, I think they got it wrong on the investments and their solutions. I would like to stay away from the specifics of which solutions and which things they are not rolling out that should be rolling out and their reaction initially is weak, I don’t want to inept, but weak, and I expect that there will be a reaction at some point in time, but I also don't think that the 40% or 50% of the market that’s mom and pop has too many options with which to bring out of the menu book or the quill of arrows to shoot at us. So I think they are going just have to accept the fact they’re going to start losing some customers. So, some of the stuff are things that we will return. They will be more competitive; some of these things are longer term, and they have to change the morale and trust of the people and some of the things cannot be fixed because I don't think they have the options, the cash or the ability to invest in the solutions. So, I think we are going to have a decent runway here, but again, I’d really like another quarter to know how many of these 5000 stock, how many more thousands came on in the next quarter and what is the revenue from both, and how far ahead do we think we are going to get on these numbers that we are giving, which at the beginning of the year, to be honest with you, I was more than a little worried about 20% growth in this market.

Larry Marsh – Barclays Capital

It seems like the message too with the update on the changes there confirms your original view that announcing a partnership this early on in the process would be a mistake and does this update for the push at your decision-making on how you go to market with health records?

David Smith

Yes. I would say that is very accurate. We believe that selling software to doctors was a mistake because we believe that something better was coming. Doctors don't know how to use software, and spending $100,000 when you can have an ASP product is ludicrous. We didn't realize with the HIT system what its meaningful use was going to be, but we just believed in those fundamentals and stayed away from what we thought was screwing the customer. So now that these changes have been made, it's really clear to us that your big brick and mortar software companies are going to have to really change to survive there. It is going to look like a steamroller hit them if they don't make changes that are cloud computing in nature, modular in nature, being able to connect with other groups, being able to plug and play, and really provide portability up to the doctor and ease of use to the doctor. To me, we are in the middle working our strategy, it’s not quite ready, it's not quite big, but this was what we needed to see to put the hammer down and really start to finalize what we are going to do. We have got a great relationship with Athena. We think Athena has a head start. They have great modular piece which is the billing piece, they are building their AHR. How much do they adopt to the other platforms that provide patient access and those kinds of things, I cannot predict, but they have a big leg-up on some of these other brick and mortar software businesses that I think they are dinosaurs. I got Scott here in the room with me; I probably said some of the things he would have said but, Scott, do you have anything to add to that without giving out our strategy?

Scott Helfrich – Vice President, Strategic Sales Development

I would just say that some of the certification paths are starting to change, and we see different things coming from Blumenthal and make it option easier, and customers are looking for low cost alternatives and easier alternatives than the traditional models that are out there as Dave referenced.

Larry Marsh – Barclays Capital

Dave Bronson, do you have an actual equipment number for the quarter in physician?

David Smith

I can tell you while he’s pulling that out that I think equipment next quarter is going to be bigger than this quarter. I think we are going to see the turn here.

David Bronson

It was just under $27 million in the quarter, Larry, and and that compares with about $31 million last year.

David Smith

So it looks like we are going to see a turn now this next quarter on equipment.

Operator

Your next question comes from the line of Eric Coldwell – Baird.

Eric Coldwell – Baird

On tuck-ins, could you size those for us? I realize those are small, but could we get some revenue numbers.

David Bronson

Under $1 million on the physician one, and I think about $3 million on the eldercare one.

Eric Coldwell – Baird

That’s annual, correct?

David Bronson

Yes.

Eric Coldwell – Baird

The 5000 new physician customers, should we read that as 5000 doctors or 5000 practice sites?

David Smith

Sites.

Eric Coldwell – Baird

5000 sites, so more than 5000 doctors?

David Smith

Yes. There could be 20 in a site. There could be three, there could be 7 or 1.

Eric Coldwell – Baird

I am sorry if I missed this, but did you give out the new Athena leads and closed deals for the relationship?

David Bronson

152 this quarter, 20% improvement for next quarter.

Eric Coldwell – Baird

20% quarter over quarter?

David Bronson

Yes, sequential

Eric Coldwell – Baird

You mentioned some of your competitors are laying people off within their alternate site businesses. Also one of your midsized competitors had massive pay reductions for their salespersons and people who are still there. How do you respond to that? Is this where some of the new client leads are coming from when sales representative sees his or her pay come down 30% to 60% overnight? Do you go out and take clients from them overnight because they are looking for new work? Do you steal some of these representatives? Have you seen any direct impact from what that specific competitor did recently?

David Smith

The way we culture our people up here is, if you are lion and you are going to attack a group of cheetah or a group of impala, you try to pick the weakest one, so if there is a company with 50 representatives, which 10 are the worst ones, and you go and put an all-out assault on those 10, and you go take the business. Regardless what is going on in that company, who are the weakest sales representatives in each company, and how do we go attack and how do we go take the business and put them out of business and force them to go away, and then, of course, we look at the morale and what is going on with that company. We look at the programs they have. We look at our competitive offering compared to theirs and we also pinpoint which area or which products we should lead where. I would not just say one or two, a lot of companies in the industry have really gone the wrong way with moral and with their people, but Gary, what’re your thoughts there?

Gary A. Corless

As I mentioned earlier, we’ve chosen an external focus through the aggressive programs that we have, and those companies have chosen inadvertently a very internal focus, and 80% some may argue of a company’s service offering to the physician office comes through the quality of the sales rep, and because of that, somebody that’s worrying about their ability to pay their bills, whether they should still work there or not, and all that definitely has a direct and immediate impact on the service that company can provide. Because of that, either because we just walked in there, reaching on a cold call, or because the customer doesn’t get what they need and they called us, the mindset of the sales rep directly impacts this business probably more so than most. So we’ll be watching that very closely, and every cheetah that slows down is an opportunity for us.

Eric Coldwell – Baird

I think I wasn’t very clear. My specific question, and you’ve answered of it, is if a big competitor fires or lays off or slashes the pay of a lot of people, it’s obvious that you can go after some of the weaker reps that count. My question was more about the reps that are retained, even if they’ve seen a massive reduction in their pay, are more likely than not the better reps, so do you get a chance to go after those reps and bring them into PSS, and is there a goal here to expand the size of your physician salesforce for example?

David Smith

I would say absolutely yes, and we will absolutely be very careful because most of these are non-competes, we have to do research on that, we have to get the noncompete, we have to look at it, we have to determine whether it fits, how it can fit, we don’t want to interfere with the contract, etc. So that part of the unintended consequence of cutting people’s pay is six months from now, nine months from now. The part that’s today is the Reach attack and the 5000 customers.

Operator

Your next question comes from the line of John Kreger - William Blair & Company.

John Kreger - William Blair & Company

David, could you clarify your view of the physician market? I think on the last earnings call you had talked about the fact that you had seen a negative impact from the broader economy towards the end of the calendar year, but that it seemed like that had stabilized and maybe even reversed in late April. As you’ve gotten a few more months to observe, what are you seeing? Are you seeing an uptick? It sounded like maybe stabilization would be a better way to describe it.

David Smith

Yes, I think it stabilized, and I would tell you that by specialty that answer is slightly different. Plastic surgery is still not stabilized. Pediatricians are very busy. Certain hormone therapy OB/GYN practices are very busy. It depends on what the doctor is practicing, what the needs are, and also what is the employment in the area. There are a lot of factors, but I would say overall it has stabilized. Overall, there are pockets of weakness. Overall, there are pockets of strength, and it could be two variables—one, the geography and, two, the practice type.

John Kreger - William Blair & Company

Can you just clarify more of the IT strategy? It sounds like you’re in the middle of recasting the strategy a bit, but can you continue to drive new revenue cycle management customers in the midst of this or should we be thinking about this more as a 3- to 6-month pause before the strategy broadens out?

David Smith

We’re already selling these products. We’re already training and spending the time in the salesforce bandwidth in the education and selling time, so for us, it’s a filling out the menu and advancing the strategy now with the current environmental changes that we were expecting, but we just didn’t know when they would happen. Actually, it’s moving a little quicker than we had originally thought, which is very positive for us to be able to build the menu and have some new options. So I think yes, we can walk and chew gum here because our customer is demanding it, and our customer will demand it. Our customer wants to be a part of the income from HIT, but they just don’t want to do it too soon and pick the wrong product and have something better come out six months later, so it’s a real balancing act, and we now see for the first time an inflection point that tells us we are going to charge and fill out our menu. So is this something we roll out at the September national meeting? Is this something that roll out at the beginning of the year or January? I can’t answer that question at this moment; we are in the middle of it, but I will tell you, to me, I saw the inflection point, and I’m ready.

John Kreger - William Blair & Company

If you look back at the success you had in signing up new customers this past quarter and compare that let’s say to a year before, what would you say the real key was that’s allowed you to open up so many new accounts?

Gary Corless

It’s really two things. One is the openness of the customer to new solutions and new people that can help, and two is our intense company-wide focus on reach through a coordinated sales, operations, customer service, delivery personnel program, so it’s combining the external opportunity with the internal strategy that’s doing it.

Operator

The next question comes from the line of Alex Beckler with Goldman Sachs.

Alex Beckler - Goldman Sachs

David, you alluded to getting more aggressive than trying to take share from competition, winning some new accounts. What kind of reaction have you seen from your competitors especially your large competitors to the strategy if any?

Gary Corless

It’s across the board depending on the reps or the company, so I don’t think there is one way to answer that question. What I would say is in staying close to our salesforce that there are two things. One, you might want to act if you are a competitor. Two, you have to have the offering to be able to act, so as Dave mentioned, and I did as well that over 40% of the market is held by independents. They obviously feel the hit when we are able to convert their business, but we are focusing on tools and resources that they don’t have. That’s what I would say. We are going to learn a lot more over the next few quarters of this strategy, but right now, we have been able to effectively deal with any countermoves.

Alex Beckler - Goldman Sachs

I have a question for David Bronson. Could you tell us about how you are prioritizing share buybacks versus M&A this year? You still have 3 million shares authorized, yet you also continue to be optimistic about making acquisitions. What are the odds that we see buyback shares or making a sizeable deal or really do both in fiscal 2010?

David Bronson

We didn’t buy any shares in the first quarter, and right now as I said in my prepared remarks, the first priority is M&A. The targets are out there, the opportunity is there, the time is right. I think that it’s likely that our deployment of capital will be in that area as opposed to share repurchases.

Operator

The next question comes from the line of John Ransom with Raymond James.

John Ransom – Raymond James

What are you hearing from your long-term care clients, particularly home healthcare as they may get slapped with $50 billion of reimbursement cuts? Are you in the early stages at all with any of those clients in terms of taking costs out of their equation?

Gary Corless

Yes, and we have been. Certainly, they see the proposed cuts whether it’s 5.5% or 6.3%. That’s a conversion that we don’t wait for, we actually provoke when we are calling on new customers or our existing customers, because we do believe we have a significant tool box of opportunities to help them reduce expenses and improve clinical outcomes, so that’s not cliché. We really can help them through a number of our service offerings and our new Pathway health consulting partnership, so it’s a conservation we provoke.

David Bronson

We tell them that reimbursements are absolutely going to go down. There is no hope that you’ll out-lobby this issue, so why don’t we start making more money on patients today, so you’re in a position to deal that cut as it comes through the programs Gary just mentioned.

John Ransom – Raymond James

How do you look at that? Is that going to be an opportunity for you to make more money because you can increase their use of non-branded products or is it going to be some pressure that you’re going to have to deal with?

Gary Corless

It’s all the above. Certainly, in some cases with customers that are looking at that is easier to convince them to save than it is to spend, but that’s not a bad thing considering we have a strong opportunity to help them save. At the end of the day, when they convert their business to us, they may save more but actually buy more from Gulf South or PSS.

John Ransom – Raymond James

Do you have any case studies or any ideas in mind of a typical situation where you have been able to go in and save them X percent? Is there a number that you have in mind when you go after a new account?

Gary Corless

I really depends on who they are buying from and what their practices are, so we look at which competitor they use because we have an idea of how they mark up their services. We look at which products they use and whether there is a generic equivalent, if it’s a pharma item or our brand. We look at their internal processes or whether they are efficient as they could be in ordering. We look at our opportunity to deliver directly to their sites if they are a home care, so there is a myriad of opportunities for us to look at. There isn’t one specific answer there because it depends on who they buy from, how sophisticated they are, and what their internal processes are like, but we find that there’ are opportunities in each.

John Ransom – Raymond James

Speaking of M&A, has the bid-ask spread moved meaningfully in either direction over the past 3 months?

Gary Corless

I would say it has. I would say that the expectations have become a lot more reasonable. Where they were maybe 10 or 11 times, they are down to 7 to 8 times. That’s where they start, that’s not where we start, but that’s where they start.

John Ransom – Raymond James

That would be EBITDA, 7 or 8 times EBITDA?

Gary Corless

Yes.

John Ransom – Raymond James

Has your attitude changed at all about, I now you guys were extremely cautious back in the depths of the credit crunch, but as your business has picked up and the credit market has stabilized, have you had any different thoughts about your ability or willingness to use leverage?

Gary Corless

We’ve got a very strong balance sheet right now. We are sitting on a lot of cash. We have an ongoing dialog with several financial institutions, keeping our finger on the pulse of the marketplace. We kind of know what that looks like, whether it’s high yield or term loans, or other kinds of financing. Right now, we are pretty happy with the way our balance sheet is structured.

David Bronson

I would just say things are definitely getting cheaper, but it would have to be the right transaction for us to lever the company.

Operator

The last question is a followup question from the line of Richard Close with Jefferies & Co.

Richard Close – Jefferies & Co.

On the Athena, the 152 doctors that are signed up in the quarter, how early did they sign up in the quarter? Maybe you could give some details on the timing, or when did they begin to I guess get on the system?

Scott Helfrich

It has been pretty consistent. June was a good month for us with Athena. We had quite a few closures come through in June, but overall the quarter was pretty consistent month to month, and as Dave mentioned earlier, a lot of physicians are in the market now looking at this because of the stimulus money that is available. Yes, there is still lot of confusion, and the rules are not out yet until December or January, so you’ve got some doctors who are aggressive, you’ve got some guys who are waiting and seeing. They don’t want to be frontiers men in this, and then you have some doctors who are engaged in and are being real cautious, so you’ve got kind of a mix with the customers and the response to what’s going on in the market.

Richard Close – Jefferies & Co.

With respect to Athena receiving the certification several months ago, did you see that positively impact the interest in their product?

Scott Helfrich

Yes. I think that did help. The CCHIT 08 certification certainly helped, and it puts their EMR in a better position in the marketplace, so that has helped.

David Smith

Thank you very much for all questions. We feel very good about the momentum and the morale of the business, the timing of our solutions, and the progress towards our goal. We look forward to updating you and seeing you on the road as Rob mentioned on the upcoming date. Thank you all very much.

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Source: PSS World Medical Inc. F1Q10 (Qtr End 6/26/09) Earnings Call Transcript
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